Former Head of Stryker Corp. Subsidiary Pleads Guilty to Fraud

The former head of a Stryker Corp. subsidiary pleaded guilty to charges that he sold unapproved surgical tools used for knee replacements to surgeons nationwide.

OtisMed Corp., based in Alameda, Calif., was bought by Stryker in 2009 after the fraudulent sales occurred. But as part of the deal reached in federal court in Newark, N.J., Stryker’s OtisMed unit agreed to pay $80 million in criminal and civil penalties after pleading guilty to a felony charge.

Stryker accepted responsibility on behalf of OtisMed and anticipates spending $100 million “to make this right,” Michael Cartier, Stryker’s deputy general counsel, said in court.

Last month, Stryker, based in Kalamazoo, Mich., agreed to a $1 billion settlement in class action litigation over faulty hip replacements produced by Stryker’s Howmedica Osteonics Corp., based in Mahwah, N.J.

Richard Adrian, a former Stryker executive who filed a whistleblower lawsuit in New Jersey, will receive $7 million of the settlement money.

Charlie Chi, 45, the former chief executive officer of OtisMed, faces up to three years in prison after pleading guilty to three misdemeanor fraud counts. Chi, of San Francisco, Calif., is to be sentenced on March 18 and has been released on $500,000 bail.

“Patients who are seeking medical care are vulnerable,” U.S. Attorney Paul Fishman said during a Dec. 8 news conference. “They are often afraid and in pain. They should be able to trust their doctors and should be entitled to trust that the devices their doctors are using are safe, effective, tested and approved. OtisMed and Charlie Chi betrayed that trust.”

In 2006, OtisMed did not seek U.S. Food and Drug Administration (FDA) approval for its marketing and distribution of the devices, which are plastic guides that fit on a patient’s knee and assist the surgeon in determining exactly where to cut the bone in order to accommodate an implant.

Over the next three years, the company sold more than 18,000 guides, called OtisKnee, generating $27 million. A number of those patients required removal of the replacements, prosecutors said, but it could not be determined if the OtisKnee products were the cause.

The company sought FDA approval to market the device in 2008, but was denied in September 2009. In a letter, the FDA said OtisMed failed to show the devices were safe and effective, leaving patients at risk, Fishman said. The letter warned OtisMed that distribution of the OtisKnee prior to approval would be an FDCA violation, and indicated the FDA viewed the product as a “significant risk device system,” which is defined as presenting a potential for serious risk to the health, safety or welfare of a subject. Chi and others at OtisMed received advice from legal and regulatory counsel confirming it would be unlawful for OtisMed to continue distributing the OtisKnee.

Against the advice of the company Board of Directors and lawyers, Chi ordered two employees to send 218 devices from California to surgeons in the week following the FDA’s rejection. The shipments, which included 16 devices to six surgeons in New Jersey, were made on Sept 10, 2009.

Fishman said Chi’s actions were prompted by his concern about the reputation of the device and the company. When OtisMed became a subsidiary of Stryker in November, 2009, Stryker had no idea that Chi had shipped the devices without FDA approval, Cartier told the court on Monday. Cartier, the company’s lawyer, said that he personally investigated when Stryker learned of Chi’s actions. Chi was then fired.

As part of the plea agreement with the government, OtisMed is barred from participating in Medicare and Medicaid for 20 years, prosecutors said.

The settlement also alleged that OtisMed encouraged health care providers to submit claims for MRIs that were not reimbursable because they were not performed for diagnostic use, but rather solely to provide data for the creation of the OtisKnee. Except as admitted in the plea agreement, the claims settled by the civil settlement agreement are allegations only, and there has been no determination of liability as to those claims.

The company will pay approximately $41.2 million, including interest, to resolve its civil liability for submitting false claims to the Medicare, TRICARE, Federal Employees Health Benefits and Medicaid programs. Of that amount, approximately $41 million will be paid to the federal government.Medicaid is funded jointly by the states and the federal government and participating Medicaid states will receive approximately $376,700 of the settlement amount.

In addition to agreeing to continue to cooperate with the government’s investigation and maintain a compliance program, Stryker agreed to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and share the results of that audit with the government.Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors regarding the effectiveness of the compliance program.